For this article, an important update is that Form 8846 is no longer limited to restaurants and food-service businesses. For tax years beginning after 2024, qualifying beauty-service businesses—including certain hair, nail, skin-care, and spa businesses—may also be eligible for the employer tip tax credit. The credit generally concerns the employer’s share of Social Security and Medicare taxes on eligible employee tips, subject to specific rules.

From AIM Financial — Business Tax Preparation in Grand Rapids, Kentwood, Wyoming, and West Michigan

Businesses that employ workers who receive tips may qualify for a valuable federal business tax credit. Restaurants, bars, and certain beauty-service businesses often pay Social Security and Medicare taxes on employee-reported tips in addition to paying regular wages. IRS Form 8846 may allow eligible employers to claim a credit for certain employer payroll taxes paid on those tips.

Understanding this tax benefit can help business owners reduce their federal tax liability while maintaining accurate payroll records. AIM Financial helps businesses understand tax forms, organize tax information, and prepare accurate federal income tax returns.

What Is IRS Form 8846?

IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, allows qualifying employers to claim a federal business tax credit for eligible employer-paid Social Security and Medicare taxes on employee tips.

Employers generally pay a combined 7.65% employer share of Social Security and Medicare taxes on applicable wages and tips, although the Social Security portion is subject to a wage limit.

For eligible employers, the credit may recover some or all of the qualifying employer payroll taxes on tips, after applying the form’s restrictions and calculations.

The credit is part of the general business credit. It is generally nonrefundable, meaning it cannot automatically generate a refund beyond the applicable tax liability. Unused credit may generally be carried back one year or forward for up to 20 years, subject to the general business credit rules.

You can review the current form on the official IRS Form 8846 page.

Which Businesses May Qualify?

For tax years beginning after 2024, the credit is available to qualifying employers in two broad categories.

1. Food and beverage businesses

Restaurants, bars, and other qualifying food or beverage businesses may be eligible when employees receive tips from customers for providing, delivering, or serving food or beverages for consumption and tipping is customary.

Examples may include:

• Full-service restaurants.
• Bars and taverns.
• Certain catering operations.
• Other qualifying food and beverage establishments.

2. Certain beauty-service businesses

The credit was expanded to include qualifying beauty-service businesses for tax years beginning after 2024. Eligible services may include:

• Barbering and hair care.
• Nail care.
• Esthetics and skin-care services.
• Body treatments and spa services.

The business must meet the applicable requirements, including having employees who receive tips for qualifying services and paying or incurring the employer share of Social Security and Medicare taxes on those tips.

Not every business that accepts tips automatically qualifies. The nature of the services, employee status, wages, and taxes paid all matter.

How Does the Employer Tip Credit Work?

The credit generally equals the qualifying employer Social Security and Medicare taxes paid or incurred on eligible employee tips.

However, the rules differ between food and beverage businesses and beauty-service businesses.

For qualifying food and beverage employers, tips used to bring an employee’s wages up to the federal minimum wage rate of $5.15 per hour—the rate in effect on January 1, 2007—cannot be included in the credit calculation.

For qualifying beauty-service employers, tips used to bring an employee’s wages up to the current federal minimum wage of $7.25 per hour generally cannot be included.

This distinction is important. A business cannot simply multiply every dollar of tips by 7.65% and claim that amount without applying the required adjustments.

The credit is also generally limited to the employer’s share of the applicable taxes. The employee’s share of Social Security and Medicare taxes and the employee-only Additional Medicare Tax are not part of this employer credit.

The IRS explains the calculation and provides examples in its official FICA Tip Credit guidance.

How Do You Complete Form 8846?

Form 8846 is designed to calculate the eligible credit and transfer it to the appropriate business tax return.

Step 1: Gather payroll records. Collect employee tip reports, payroll registers, Forms W-2, and records showing the employer Social Security and Medicare taxes paid or incurred.

Step 2: Identify qualifying tips. Separate tips received for eligible services from amounts that do not qualify. Mandatory service charges generally are treated as wages rather than tips for this purpose.

Step 3: Apply the appropriate minimum-wage adjustment. Calculate any tips that must be excluded because they are used to meet the applicable minimum-wage threshold. Use the separate rules for food and beverage employers and beauty-service employers.

Step 4: Calculate the creditable tips. Complete the applicable lines on Form 8846 using the eligible tip amounts and payroll-tax information.

Step 5: Account for the Social Security wage limit. If an employee’s wages and tips exceed the applicable Social Security wage base, the credit calculation may need to account for tips subject only to Medicare tax. The wage base changes annually, so use the correct tax-year instructions.

Step 6: Report the credit correctly. Partnerships and S corporations generally report the credit through their pass-through reporting procedures. Other eligible taxpayers generally report the credit through Form 3800, General Business Credit, as instructed by the IRS.

The exact reporting process depends on the business structure and tax year.

Example: A Restaurant Reviewing Its Tip Credit

Suppose a qualifying restaurant has employees who report tips, and the restaurant pays the employer share of Social Security and Medicare taxes on those tips.

The restaurant cannot automatically claim a credit based on all reported tips. It must first identify eligible tips, exclude any amount disallowed under the applicable minimum-wage calculation, and account for Social Security wage limits where relevant.

After these adjustments, the restaurant calculates the credit using the applicable tax rates and follows the instructions for reporting it on its business tax return.

A salon or spa must perform a similar review but apply the beauty-service rules, including the applicable minimum-wage adjustment.

These calculations can make professional review valuable, particularly when a business has multiple employees, varying wage rates, or several types of services.

What Records Should Employers Keep?

Good documentation is essential when claiming Form 8846.

Businesses should retain:

• Employee tip reports and tip-pooling records.
• Payroll registers and Forms W-2.
• Records of employer Social Security and Medicare taxes paid.
• Employee hours and wages by pay period.
• Records identifying the services performed.
• Calculations showing excluded tips and the final credit.
• Copies of filed business tax returns and Form 8846.

Employers should also maintain accurate records distinguishing voluntary customer tips from mandatory service charges. The IRS may treat these payments differently for payroll tax purposes.

The IRS generally allows an employer to claim the credit on an original or amended return within three years from the due date of the return, subject to applicable rules. A business that overlooked a qualifying credit on a prior return may wish to ask a tax professional whether an amended return is appropriate.

Does the New Deduction for Tips Replace Form 8846?

No. The federal deduction for certain qualified tips, available to eligible individuals for tax years 2025 through 2028, is a separate tax provision from the employer credit claimed on Form 8846.

The individual deduction may reduce an eligible worker’s federal income tax, subject to occupation, income, and other requirements. Form 8846 addresses qualifying employer Social Security and Medicare taxes.

Businesses should review both provisions where relevant, without assuming that one replaces the other.

Get Business Tax Help From AIM Financial

Restaurant owners, salon operators, barbershop owners, and spa businesses may have opportunities to claim tax credits, but the rules require careful payroll records and accurate calculations.

AIM Financial helps businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan with business tax preparation and federal tax reporting. We can help you organize business records, review applicable forms, and determine whether a tax credit may apply to your circumstances.

If your business employs tipped workers, contact AIM Financial to discuss your tax preparation needs. Reviewing eligible credits before filing may help your business avoid missed opportunities and maintain more accurate tax records.

This article is for general educational purposes and is not individualized tax advice. Eligibility for Form 8846 depends on the business, services performed, employee wages, tips, taxes paid, and applicable tax-year rules.